Strategic HRM: Building organizational capabilities

One of the significant shifts in the evolution of the HR practice is the expansion of its charter from just personnel management to include organization development and effectiveness. This added dimension highlighted the strategic component of the HR function. The expanded mandate of developing the organizational capabilities of an enterprise puts the profession in the same playing field as the finance, operations and marketing functions.

What are Organizational Capabilities?

The consulting firm, McKinsey defines organizational capabilities as “anything that people do well that drives business results”. Think of companies like Apple or Google and what they are conspicuously known for and you get a layman’s definition of organizational capabilities. Among Philippine companies, think of Cebu Pacific and its ability to deliver low cost in air travel; or Ayala Corporation and its professional management competence.

David Ulrich, the well-known HR guru refers to it as “the firm’s ability to manage people in order to gain competitive advantage.” He adds that “these abilities are derived from the collective competencies of people and the organization’s culture.” Competencies refer to attitudes, knowledge and skills required to perform the organization’s tasks while organizational culture is the collective mindset and practices of an organization.

Examples of organizational capabilities would include, among others: inspiring leadership; agility and speed; customer focus and innovation. The Malcolm Baldrige Performance Excellence Criteria, accepted throughout the world as a roadmap for world-class organizational excellence, represent a set of organizational capabilities. These capabilities include: leadership; customer orientation, people focus, process excellence & innovation.

Why focus on Organizational Capabilities?

Business strategy gurus, Gary Hamel and C. K. Prahalad in their classic article entitled “The Core Competency of Corporation” (published in the Harvard Business Review in 1989) assert that organizational capabilities are the main source of sustainable competitive advantage. They are typically unique to an organization & therefore difficult to copy.

Furthermore, organizational capabilities need to support successful business models. Oftentimes, as firms expand and grow, the intangible capabilities of leadership, flexibility and process management are overlooked, resulting in barriers to further growth. The strategic perspective of building organizational capabilities is becoming dominant after decades of exclusive attention to financial capital and product/market mix.

Organizational capabilities are part of what is known as “Intangible Assets”. Intangible assets consist of knowledge products (such as software, financial services, outsourced solutions and creative services) and organization capabilities such as shared mindset, leadership, customer connection etc. Bill Gates dramatizes the importance of intangibles when he said: “Our primary assets are our software and software development skills. They do not show up on our balance sheet at all. However, only less than 3% of Microsoft’s market value is accounted for by tangible physical and financial assets”. In today’s world, intangibles constitute 90% of the market value of the average S&P 500 company. This is the underlying rationale for the attention given today on human capital, the notion that people are investors in the growth of a corporation.

Organization Development and Organizational Capabilities

Organization Development (OD) has traditionally been defined as a behavioural science approach to managing change. I would refine this definition by adding the perspective of OD as a strategy for building organizational capabilities to sustain business results. This strategy consists of integrating and leveraging the organizational capabilities of leadership, unity of purpose, process excellence and people engagement.

But what is an organization? Beyond organization charts, the construct of organization is one of the least understood aspects of business management. The concept of organization is one of the greatest inventions of man, one of the greatest enablers of human progress. One view of organization is that of a social convention, synergizing unity of purpose, processes and human capital. Organizations enable strategies. A brilliant strategy without the appropriate organization to support it can spell its eventual failure.

The discipline and practice known as Organization Development surfaced at the end of World War II , together with the euphoria brought about by the victory of liberal democracy over fascism and authoritarianism. As a parallel movement in the field of management practice, organization development emerged as a reaction to the models of bureaucracy and scientific management. This management practice was initially known as the human relations school of management and was led by prominent thought leaders such as Abraham Maslow, Kurt Lewin, Chris Argyris, Frederick Herzberg and Douglas McGregor.

From an advocacy of democratic and human potential values, OD has evolved as an organization effectiveness and growth oriented approach to long term survival and success. The best selling book, “In Search of Excellence” by Peters and Waterman is considered a seminal work in the field of OD. Then, in the early nineties, the Malcolm Baldrige Performance Excellence Criteria emerged as the most influential framework for creating excellent organizations. As earlier noted, the framework advocates the institutionalization of organizational capabilities. My OD practice, starting in the mid-seventies in San Miguel Corporation, was heavily influenced by these thought leaders . Organization Development, for me, combines the advocacy of human values, the behavioural technology of change and the standards of organization excellence.

How HR contributes to the development of Organizational Capabilities

Strategic HRM is the link between business strategies and the human and social components of the firm. Building these intangible capabilities falls within the orbit of the HR practice. In fact, I would assert that HR is the natural champion of this critical success factor. In practice, HR should advocate the integration of organizational capabilities into the overall business strategy and lead the translation of business strategies to employee actions and commitment. Through the practice of OD, the HR function provides the change management process and serves as the main resource for building the organization infrastructure required for business strategies to flourish. Building organizational capabilities is the business of the CEO. The CEO and his management team are the architects of this social structure & their key partner is the HR manager.

(Enrique is considered a pioneer in the organization development field in the Philippines, having headed the first OD unit of San Miguel Corporation and was an expatriate executive of the giant petroleum company, ExxonMobil Corporation in HongKong, Singapore, Belgium and the United States for over 10 years. Ric taught at the SAIDI school of OD, the Manila MBA program of the University of Western Australia, the Masters in Quality and Productivity Program of the Development Academy of the Philippines and is currentlly the Deputy Chair of the Asian Institute of HR. He is the Principal Consultant of Organizational Transformation, Inc. and is the Chief Learning Officer of Huris, an HR solutions firm. He was elected a Diplomate (the highest honorary rank conferred by the Philippine Society of Fellows in People Management) and is currently its President. He was the 2008 National President of the People Management Association of the Philippines.)